Hormel Foods Acquires Muscle Milk Maker

Hormel Foods Corporation, best known as the maker of Spam and other meat products, has agreed to purchase CytoSport Holdings Inc., the company that owns Muscle Milk, for approximately $450 million. The agreement, which also includes the brand’s manufacturing facility in Benicia, Calif., and several manufacturing and distribution agreements in the U.S. and abroad, was disclosed on Monday night.

In a conference call Tuesday morning, Hormel president and CEO Jeffrey Ettinger said that Muscle Milk gives the company an identifiable brand that can diversify its portfolio. The two parties already have a working history together that may have eased the deal-making process. For many years, Hormel has served as an ingredient supplier to CytoSport through its Century Foods International (CFI) operation within its specialty foods segment. Hormel has long functioned as a meat company, however, it began expanding its non-meat protein portfolio with a $700 million deal for Skippy Peanut Butter in January 2013.

“This acquisition will serve as a growth catalyst for our specialty foods segment by adding a branded franchise in the fast-growing sports nutrition space,” Ettinger said.

The agreement comes amid a flurry of protein-related deals. In June, Tyson Foods Inc. acquired Hillshire Brands Co. for $7.7 billion. In response to the Tyson deal, Pinnacle Foods Inc. announced Monday that it has terminated its merger with Hillshire, which was finalized before the Tyson deal. As part of the terms of the merger agreement, Hillshire will give Pinnacle $163 million. Meanwhile, Chinese meat company WH Group, then known as Shuanghui International Holdings, acquired U.S. pork company Smithfield Foods Inc. last year for $4.7 billion, the largest Chinese acquisition of an American company, according to The Wall Street Journal.

The final price tag in the Hormel deal represents a smaller figure than the $500 million that the CytoSport owners and key investor TSG Consumer Partners, LLC, had hoped to draw from the sale. As part of the agreement, TSG, a private equity firm, also sold its stake in the company. Brian Krumrei, managing director at TSG, said: “This transaction represents an exceptional outcome for CytoSport, TSG Consumer Partners and Hormel Foods. We look forward to watching the company’s continued success under new ownership.”

Ettinger acknowledged that, as the buyer, he couldn’t speak much for the seller, but he did note that the CytoSport owners — a father and son team of Greg and Michael Pickett — had been shopping the company for the past few years.

“That has potentially diverted some attention away from the growth momentum that they had previously enjoyed,” Ettinger said.

Another factor that has been frequently cited as a source of the brand’s waning momentum is derived from the name itself. In July 2011, the U.S. Food and Drug Administration issued a warning letter to CytoSport, saying that the brand’s labels could be misleading to consumers. At the root of the issue: Muscle Milk doesn’t contain milk. The complaint seeks an injunction on the use of the word “milk” in the marketing of all Muscle Milk products that don’t contain milk.

Hormel approximates that CytoSport sales have reached $370 million. According to IRI, a Chicago-based market research firm, CytoSport has generated more than $335 million in sales in the latest 52 weeks ending on April 20 in U.S. multi-outlet channels, including gas and convenience stores, supermarkets, drugstores, mass retailers, military commissaries and select club and dollar retail chains.

Hormel plans to exceed its goal of 5 percent top-line growth for the brand. The agreement includes an additional $20 million in potential gains, in excess of the valuation, that are tied to specific financial performance criteria. The company also noted that, after the deal, it remains in a strong financial position to fund other capital needs.

Ettinger said that nearly 30 percent of Muscle Milk sales are accumulated in the convenience store channel, with much of this national distribution handled by PepsiAmericas, Inc.

“There’s a lot of room to go in the food, drug, mass and specialty channels in terms of ability to obtain more placement here in the U.S.,” he said.

CytoSport sales outside of the U.S. are fewer than 10 percent of the company’s total sales, he said. Existing marketing and sales efforts can be found in Canada, the United Kingdom, Germany and Australia. Hormel plans to reach other, non-English speaking countries, Ettinger said, such as the Latin American countries.

As Hormel plans to expand CytoSport’s presence on both a national and international level, the company is still assessing the scalability of the Muscle Milk brand. Would the existing brand have mass appeal, or would Hormel need to add to the product portfolio and alter the branding?

“That’s one that we’re going to have to think about and study,” Ettinger said.

With help from its co-packing partner CFI, Hormel has already plunged into the on-the-go protein market. Ettinger repeatedly mentioned Rev Wraps, an extensive line of meat and cheese sandwich wraps, and Skippy Singles, 1.5 oz. cups of peanut butter. Through CFI, Hormel has also been producing 2good, a greek yogurt smoothie, but he said that product is at an embryonic stage.

A few brands to watch when considering the ripple effects of the Hormel deal: Core Power and Muscle Monster. A number of ready-to-drink protein brands have been criticized for targeting too narrow of a consumer base. However, Core Power, which Coca-Cola acquired in December 2012, represents a brand with the potential to grow through a wider demographic and the inherent benefits of the red truck system. According to IRI figures from the aforementioned channels, Core Power has amassed more than $26 million in sales in the past 52 weeks ending on April 20. This figure represents a 647 percent increase from the the previous year. The latter of the two, Muscle Monster, which Monster Energy launched at the end of May, packs a strong branding and distribution platform even in its infancy.

Looking back on his company’s development, CytoSport chairman and founder Greg Pickett said the following in a company release:

“We are excited for the future of the company and are fully confident that aligning our team’s knowledge and experience in the sports nutrition world with the incredibly robust global strategies of Hormel Foods will help the company establish an even stronger portfolio of brands and products…My family is extremely proud of where the company sits today and grateful to the passionate people who have been a part of this extraordinary adventure.”